Local vs. long distance investing?

Question

What are the criteria that people consider when deciding where to invest? It seems that it often comes down to comfort level and familiarity with markets. I am comfortable with in-person property searching but have not yet developed a reliable system for long distance. Suggestions?

Brian Kantor · Answer

@Greg Koszkul and @Kana Watanabe. I just purchased my first rental property, both long-distance and during covid. Speaking from experience, @Ashley Stieger hit the nail on the head; it's all about building your team first. I interviewed close to 20 agents and 20 property managers and leveraged them together to help me find the right property.

Once you have 2+ independent people on your team, they can provide not just "eyes on the ground", but also serve as checks and balances on each other. My Property Manager vetted the property my agent showed me to "confirm" it would rent easily and what I could expect to get for it. My agent vetted the work that my contractor did to "confirm" it was being done to the level of quality I needed.

I definitely agree with @Caleb Brown, though, that your first order of business should be reading David Greene's book, "Long Distance Real Estate Investing", which served as my blueprint.

When looking for markets, there are so many inexpensive areas to choose from. People on BP love the bigger markets in Ohio, Florida, Alabama, and Michigan. Pick someplace that you can drive or fly to roundtrip in a day if you can or where you have some friends/family nearby to provide insight, stop by as a favor to you, or even serve as an "excuse" for you to go yourself when you visit them.

Feel free to DM me with any questions.

Ashley Stieger · Answer

@Greg Koszkul,

I agree with @Craig Curelop, creativity is helpful here in Denver. Additionally, consider looking at more than just the cash flow when calculating the ROI, such as appreciation, tax benefits, and debt pay down.  Denver might become a more enticing market when looking at the whole picture.

Whether you decide to stay local or go out-of-state, make sure to create a team including:	1. investor-focused RE agent;	2. solid property manager; and	3. reliable contractors. In my experience, the numbers only work if the right team is in place. Building relationships with RE professionals and other investors in your chosen market is just as important as your comfort level with an area. Attend local meetups (many are online now) and connect on bp with other investors in your chosen market.

Good luck in your REI journey!

Daniel Toshev · Answer

@Greg Koszkul

I know all the pros of investing local and totally love it. The sad truth is though, I'm from Denver and, at least for me, it's impossible to find anything that would perform over 1%. I invest in Alabama,  where I can get 4 or 5 sfh for the price of 1 in Denver and they all get at least 2%. Many are

So, it's true you get cheated and overcharged sometimes, and you don't have the same control, and managers don't tend your property like you would personally, but for me it's worth it

Randall Alan · Answer

I am a local investor, and I self manage my properties.  If you are in that boat, it is really hard to make the leap to long distance investing (at least for me).  I like the control I have, and think of long distance investing a lot more like investing in the stock market... you are trusting that the people hired to manage your (stocks / property) will do a good job, care, perform, and not lose your money.  But all too often you see where a company's stock plummets due to mismanagement.  For real estate investing, I think the same thing can happen, you have increased expenses of property management, using their vendors, which from my limited experience with PMs charge way more than what a handyman could do the job for, etc.   I just can't get comfortable not having the control over making sure my investment is performing well.  I'm sure there are lots of people that can do that, but I think they are making 1/2 (or less)  of the return that self managed property owners are.

I had a garage door opener quit at a property my wife owned when I first met her.  Her property management company wanted $800 to replace the garage door opener.  I told her she was crazy, we went to Sears, bought an opener for $160, and installed it in 2 hours and saved $640.  But even if I had paid my handyman to install it, it would have been less than $100 labor... so you can see where you can just really get ripped off not being able to put your own eyes / hands on a property.  That $600  - had we had to pay it - represents 2-3 months worth of rental income from that property. How quickly does that tank your profitability?

We are very much focused on our properties performing at maximum income producing capacity.  I don't think investing at a distance that you can achieve that.  If you don't require that, you can probably get more comfortable with distance investing, but I again suggest you will probably be earning about 1/2 of what you could if you were self managing.

If you have a financed property that is renting for $1,000 a month, and you would regularly net $300 profit on that rental, by having property management you are giving away 10% (of $1,000) for their base service.  That's 1/3 of your profit!  I just can't do it.  Once a property is free and clear, I think property management can start to at least make more sense as a percentage of profit... but its tough to swallow if your property is financed.

Randy

James Carlson · Answer

@Greg Koszkul

Buying where you live or buying out-of-state totally depends on your goals. We work in Denver and Colorado Springs, two of the hottest markets in the country, so we get this question a lot from people who already rent here. I have a few thoughts:

• If you haven't bought a primary residence, you should buy where you live. That is your first "investment.) Everyone needs a place to stay. Might as well gain some equity from it. If you want some sort of rental component, then house hack it. Rent out a room. Or find a place with a basement apartment that you can rent long-term or on Airbnb (with the added bonus of a little more privacy.)
• What's your main motivation? Cash flow? A nice place to live with future potential? The standard line is that you find cash flow in the midwest and appreciation in fast-growing (expensive) markets like Denver. Denver's tough to cash flow in. But it's also averaged 6% appreciation per year for the last 40 years, and with the underlying fundamentals -- low unemployment, density of high-paying jobs, diversity of industry, low inventory and high demand, and great quality of life -- there's no indication this is slowing down. When you account for all the ways that real estate makes you money, Denver's returns look pretty good.
• Another consideration is amount of work you want to do. You can cash flow in Denver and Colorado Springs by getting "creative," as others have noted, but know that that also means more work. No matter how hands-off you try to make it, renting by the room will require more leases, more personalities to juggle. Not a bad thing and it can totally be worth it, but you should have that conversation with yourself about how much work you want to do.

Either way, almost more important than making the absolute best decision is making a choice at all. Do some research but then take some action. You'll never make the perfect choice, so get your hands dirty and learn through experience.

Good luck!

Laticia Braxton · Answer

I totally agree with @Randall Alan.  I also suggest that you start locally, where you can self-manage your property.  The experience will definitely come with challenges, especially if you are not experienced in property management, but the knowledge that you will gain very quickly in addition to the revenue that you will save in doing so, will make it all worthwhile.

You will also better position yourself to know how your properties should be managed in the event that you hire a PM down the road. A lot of investors are unfortunately learning that they are being scammed by unprofessional and dishonest PM's in more ways than one.  Try it out first, then decide if it is something that you need to outsource.

Best of luck to you!

Laticia

Caleb Brown · Answer

I agree with what everyone says to start local if it makes sense. Some markets are stable and don't fluctuate as much as others. I've seen investors go to the Midwest due to this along with cheaper prices. It all depends on comfort level and goals. if you do go OOS read David Greene's book, " Long Distance Real Estate Investing"

Craig Curelop · Answer

@Daniel Toshev - It is entirely possible to get things CLOSE to the 1% rule here in Denver. You just need to get a bit creative. The rent by the room strategy or adding a mother-in-law suite allows you to get pretty darn close to the 1% rule.

All of my properties in Denver are very close to the 1% rule and cash flow me $500 to $1,000 per month.

Zeke Liston · Answer

Hi @Greg Koszkul, the right team will be crucial. Having your CORE 4 set up will be extremely helpful.

Kana Watanabe · Answer

Thank you, @BrianKantor. We recently finished David Greene's "BRRRR Method" and "Long Distance Real Estate Investing." Both are great resources and we like that system of checks and balances. Now to zero in on a market...

Local vs. long distance investing?

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